Survey of Emerging Market Conditions

Transcription

1 Survey of Emerging Market Conditions Quarter Published August 30, 2007 Lead Researcher and Analyst Dr. Wayne R. Archer, Director University of Florida Bergstrom Center for Real Estate Studies Professor of Real Estate and Wachovia Fellow - Warrington College of Business Editorial Board Mr. Lewis Goodkin, President Goodkin Consulting, Miami, FL Dr. Hank Fishkind, President Fishkind & Associates, Inc., Orlando, FL Mr. Chuck Davis, Director MetLife Real Estate Investments, Tampa, FL For more information about the survey or the Bergstrom Center for Real Estate Studies, visit our website at University of Florida Bergstrom Center for Real Estate Studies

2 Executive Summary & Conclusions With continued news about distress in condominium markets, rising sub-prime foreclosures, and now disruptions in mortgage securities markets, it is no surprise that views of our expert survey respondents have grown more sober. Still, it is important to look carefully; despite the news, for yet another quarter rental real estate markets remain steady. According to our respondents, distress conditions remain limited to condos and existing for-sale housing (not covered in our survey). Equally important, our survey suggests much less concern that is widely perceived for new single family development. Prominent Findings Single family development, while at a low level, continues to be regarded as stable by our expert respondents. Condominium markets continue to be regarded as in poor condition. Rental markets, including apartments, office, industrial, and retail, continue to be regarded as basically stable and healthy. The overall outlook for real estate investment has declined somewhat, no doubt reflecting the sobered outlook for housing markets. The outlook for our respondents own business continues to decline. Cap rates, a fundamental indicator of perceived risk in value, have remained remarkably undisturbed by current real estate problems. The Survey Our quarterly survey, conducted by the Bergstrom Center for Real Estate Studies, Warrington College of Business Administration, University of Florida, is in its eighth fielding. The total number of participants, at 263, is the most extensive survey of Florida professional real estate analysts and investors conducted on an ongoing basis. It includes respondents representing thirteen urban regions of the state and up to fifteen property types. General Investment Outlook The general outlook for investing in property in Florida is mixed and trending toward more caution. After a boost in optimism at the beginning of the year, the drift has been toward a more cautious outlook during the following two quarters. Single Family & Condominium Development The market outlook for development of single family residential remains stable, with no expected increase or decline in the rate of absorption. This is in contrast to growing pessimism about condominium absorption. The outlook for new home prices is less stable, with single family prices expected to lag inflation, and condo prices possibly declining. The outlook for investment in single family projects remains mixed, while the outlook for condominium development is poor. Apartments Apartment occupancy is expected to remain stable. On the other hand, expectations for rental rate growth have taken a sudden downturn, with growth expected to lag inflation. This is the weakest outlook for rental rates in the last seven quarters. Despite growing caution, the outlook for apartment investment remains mixed. Industrial The occupancy outlook for all types of industrial property has become more conservative, tending 2007 University of Florida Bergstrom Center for Real Estate Studies 1

3 toward steady state. Still, growth in rental rates is expected to match or exceed inflation. The outlook for investment in industrial properties continues to be mixed, but tends toward positive. Office The outlook for office occupancy continues a three quarter decline from expected rises to expected steady state. Expectations for rental rate growth have declined from growth exceeding inflation to growth lagging inflation. The outlook for office investment has declined over two quarters from mixed positive, to mixed negative. Retail The outlook for retail occupancy has grown conservative for all retail property, and now is uniformly indicating little change. The outlook for rental rate changes also has grown conservative, expecting increases below the rate of inflation. Similarly, the outlook for retail investment has declined in most cases to mixed negative. Land Investment The drift in outlook for land investment is toward caution, but with variation. The outlook for investment in office/retail land, industrial, hospitality or for urban renewal remains mixed to positive while the outlook for unentitled land or residential land is mixed to negative. Capital Availability While there are no expected changes in available capital for acquisitions, there is concern that the capital available for development will decrease in the near future. Cap Rates & Yields Cap rates and expected all-equity yields have remained remarkably stable in the face of widespread concern in the investment markets. In every property type, though our respondents over the last year have repeatedly reported that they expect cap rates to rise, actual reported cap rates remain unchanged. This outcome is most likely a signal that rental markets are more stable than our respondents had expected. Own Business Outlook The survey respondents perception of their own business outlook has continued its dramatic decline over the past seven quarters, with another significant decrease this quarter University of Florida Bergstrom Center for Real Estate Studies 2

4 Table of Contents Executive Summary & Conclusions...1 Prominent Findings...1 The Survey...1 General Investment Outlook...1 Single Family & Condominium Development...1 Apartments...1 Industrial...1 Office...2 Retail...2 Land Investment...2 Capital Availability...2 Cap Rates & Yields...2 Own Business Outlook...2 Introduction...6 Methodology...6 Respondents...6 Scope...6 About the Bergstrom Center...7 Section 1: Overall Investment Outlook...8 Section 2: Residential Development...9 Overview...9 Expected Absorption Rates...9 Expected Price Changes...9 Investment Outlook...10 Section 3: Apartments...11 Overview...11 Expected Occupancy...11 Expected Rental Rates...11 Investment Outlook...12 Cap Rates...12 Required Yields...13 Section 4: Industrial...15 Overview...15 Expected Occupancy University of Florida Bergstrom Center for Real Estate Studies 3

5 Expected Rental Rates...15 Investment Outlook...16 Cap Rates...16 Yields...17 Section 5: Office...19 Overview...19 Expected Occupancy...19 Expected Rental Rates...19 Investment Outlook...20 Cap Rates...20 Yields...21 Section 6: Retail...23 Overview...23 Expected Occupancy...23 Expected Rental Rates...23 Investment Outlook...24 Cap Rates...24 Yields...25 Section 7: Outlook for Investment in Undeveloped Land...27 Overview...27 Land Without Entitlements or with Residential Entitlements...27 Land With Office or Retail Entitlements...27 Land with Hospitality Entitlements...27 Land with Entitlements for Warehouse or R & D...27 Land for Urban Renewal...28 Section 8: Business and Capital Availability Outlook...29 Capital Availability...29 Outlook of Own Business...29 Section 9: Dominant Investors...31 Section 10: Characteristics of Survey Respondents...32 Profession of Respondents...32 Markets of Familiarity...32 Property Types of Familiarity...33 Section 11: Details of Cap Rates, Yields & Expected Changes...34 Section 12: Industry Leaders Comments University of Florida Bergstrom Center for Real Estate Studies 4

6 Capital Markets...36 Economic and Market Activity...37 Tax and Insurance University of Florida Bergstrom Center for Real Estate Studies 5

7 Survey of Emerging Market Conditions May 2007 Introduction The Survey of Emerging Market Conditions targets the experienced leadership of Florida s real estate development and investment community to gain insights and market intelligence on matters of fundamental importance to real estate practitioners and policy-makers across Florida. A full report, including comments from respondents and analysis of specific geographic markets, will be available online by early September at Methodology This Survey is the only Florida-centered survey of leaders and professional advisors in the real estate industry. It analyzes prospective data to produce extensive forecasting information pertinent to 37 of the state s 67 counties. The survey is administered by the Bergstrom Center for Real Estate Studies at the University of Florida. With the highly fragmented nature of real estate, no survey can encompass all aspects of the real estate industry. To face this challenge, our Survey employs a quarterly sounding from multiple groups of market leaders and professional groups advising them. Respondents Our respondent group boasts some of the most impressive credentials in the industry. Members of the 140-member UF Real Estate Advisory Board are some of our most prominent and valuable resources, providing years of experience and unparalleled success in every geographic area of Florida, and in every market type. Other participants include members of the Florida Chapter of the CCIM (Certified Commercial Investment Member) Institute, Society of Industrial and Office Realtors (SIOR), Appraisal Institute Chapter X, and leadership from the International Council of Shopping (ICSC). Scope Like virtually all surveys of investment real estate markets, this survey gathers opinion. Thus, it distills complex judgments, and amounts to a carefully controlled and structured conversation with truly qualified real estate experts. The survey asks questions carefully designed to avoid ambiguities, a major problem in collecting complex information. The Survey of Emerging Market Conditions screens respondents at two levels of refinement to assure truly expert opinions. First, only persons with established real estate credentials are invited to participate. Second, each respondent is asked to respond only for those localities and property types where he or she is an active expert. The result is that all the data collected can be regarded as authoritative, no matter how small the sample of responses for a property type-locality cell. (We maintain a minimum of at least four respondents for any market cell to guard against response mistakes.) In short, even data from the least actively covered markets that we report have value as an additional expert opinion. In the more actively reported market cells, our data represent an extraordinary consensus of the experts. Survey results are anecdotal findings about required returns and investment objectives of owners and investors contemplating acquisitions or deciding about the timing of dispositions. Therefore the survey is a measure of current and prospective market perceptions, including the confidence levels exhibited by leading real estate professionals and market participants. In other words, the Survey of Emerging Market Conditions is a report of anticipated returns, business outlook and other forecasting views, rather than an analysis of actual or historical performance. The most valuable benefit for many may be interpretation of survey results over time to better comprehend market trends and shifts University of Florida Bergstrom Center for Real Estate Studies 6

8 Survey of Emerging Market Conditions May 2007 About the Bergstrom Center For more than 30 years, the Bergstrom Center for Real Estate Studies at the University of Florida has been cultivating synergy between research, academics, students, and industry leaders who drive the real estate marketplace. The Bergstrom Center supports the UF real estate courses and degree programs housed in the Warrington College of Business Administration s Department of Finance, Insurance, and Real Estate University of Florida Bergstrom Center for Real Estate Studies 7

9 Survey of Emerging Market Conditions May 2007 Section 1: Overall Investment Outlook The general outlook for investing in property in Florida, while not negative, is mixed and trending toward more caution. After a boost toward greater optimism at the beginning of the year, the drift has been toward a more cautious outlook during the following three quarters. Since this investment index is weighted 40 percent on single family and residential condominium development, 40 percent on rental property of all types and 20 percent on undeveloped land, it is at least fifty percent driven by the residential development outlook. Thus, as reported below, its downward trend is not surprising University of Florida Bergstrom Center for Real Estate Studies 8

10 Survey of Emerging Market Conditions May 2007 Section 2: Residential Development Overview The outlook for development of single family residential remains stable, with no expected improvement or decline in the rate of absorption. This is in contrast with a growing expectation of decline in condominium absorption. However, there is general pessimism about residential prices, with most respondents expecting single family prices to lag inflation. With condominium prices the expectation is even more pessimistic, with many respondents expecting declines. Despite the poor expectation for prices, the outlook for investment in single family development remains mixed, though the outlook for condominium development is poor. Expected Absorption Rates Following a notable improvement in the first quarter of 2007, the outlook for residential absorption rates for single family development appears to have leveled off over the last two quarters as a return to neutral expectations appears to be occurring. Not surprisingly, expectations for condo absorption rates are more pessimistic than for single family, and have continued to edge downward from the previous quarter. Expected Price Changes The expectation for new residence prices appears to continue its weakening trend. Despite a notable move toward stability in the first quarter of 2007, expectations have settled for increases that lag inflation. Once again, the outlook for condominium prices is more pessimistic than for single family University of Florida Bergstrom Center for Real Estate Studies 9

11 Survey of Emerging Market Conditions May 2007 Investment Outlook Following last quarter s decline, the outlook for investment in residential development appears to have leveled off as neutral expectations appear to be prevailing. As a result, it appears that it is a mixed time to buy, with possible indications that the outlook may continue to decline. Again, the outlook for condo development is less optimistic than for single family University of Florida Bergstrom Center for Real Estate Studies 10

12 Survey of Emerging Market Conditions May 2007 Section 3: Apartments Overview The outlook for apartment occupancy has stabilized for both market rent and conversion apartments with a slight leaning toward increased occupancy. On the other hand, expectations for rental rate increases have taken a sudden turn downward, with increases expected to lag inflation, as with apartments for conversion. This is the weakest expectation for market rent apartment rents in the last seven quarters. The outlook for investment in market rent apartments has declined for the second consecutive quarter, but remains mixed to slightly positive. The outlook for investment in conversion apartments has risen for the third consecutive quarter, improving from poor to mixed. Expected Occupancy Over the last three quarters, average expectations for market rent apartments have moved away from the positive expectations of rising occupancy observed in the fourth quarter of Survey respondents appear to be settling towards expectations of no change. Expectations for condo conversion occupancy, on the other hand, appear to have reversed course and are moving in a more positive direction than those for market rent apartments. Expected Rental Rates Expectations for apartment rental rates in Florida have experienced dramatic movements over the past quarter. For apartments considered to be potential condo conversions, expectations of rental rates have experienced a significant increase during the third quarter of They are now expected to increase at the rate of inflation, a sharp contrast from just a quarter ago. Expectations for market rent apartments, on the other hand, have continued a considerable decline that began three quarters ago. Growth in rental rates for market rent apartments appears to be moving toward rate increases that will lag inflation University of Florida Bergstrom Center for Real Estate Studies 11

13 Survey of Emerging Market Conditions May 2007 Investment Outlook The outlook for apartment investment appears to be converging towards neutral expectations for both market rent apartments and condo conversions. While the outlook for investment in market rent apartments continues to settle towards neutrality, the outlook for potential condo conversions is continuing to rebound from its low in the fourth quarter of While expectations are moving in opposite directions for each market, it still appears to be a mixed time to buy for both. Cap Rates Cap rates are particularly significant as an indicator of fundamental condition in real estate 2007 University of Florida Bergstrom Center for Real Estate Studies 12

14 Survey of Emerging Market Conditions May 2007 markets. The fact that apartment cap rates in Florida have remained at a relatively low level, with virtually no movement over the past quarter, signals that investors have remained steady in their confidence and risk perceptions of apartments during that time. Despite the relative stability that has been witnessed over the past few quarters, our respondents expectations still appear to indicate an increase in the future. Required Yields Required yields for condo conversions have understandably run higher than for market rent apartments. However, required yields for both types of apartments appear to have leveled off over the past two quarters, experiencing relatively no change during this time period. Despite apparent stability over the past two quarters, expectations appear to be for yields to increase in the future 2007 University of Florida Bergstrom Center for Real Estate Studies 13

15 Survey of Emerging Market Conditions May 2007 for condo conversions and market rent apartments University of Florida Bergstrom Center for Real Estate Studies 14

16 Survey of Emerging Market Conditions May 2007 Section 4: Industrial Overview The occupancy outlook for all types of industrial property has become more conservative for the second consecutive quarter, falling from a strong expectation of increased occupancy to expecting no change. Still, growth in rental rates is expected to exceed inflation for warehouse and distribution properties, while growth in rental rates is expected to nearly match inflation for flex space, R& D, and for office-warehouse. The outlook for investment in industrial properties continues to be mixed, but tending toward positive. Expected Occupancy The expectation for industrial occupancy has declined significantly over the last two quarters. There appears to have been a dramatic movement away from the optimism of the first quarter of 2007 and subsequently towards more neutral expectations of no change. Expected Rental Rates Expectations for rental rates appear to continue their move towards a neutral outlook. For both types of properties the expectation is for rental rate growth to rise at or close to the rate of inflation University of Florida Bergstrom Center for Real Estate Studies 15

17 Survey of Emerging Market Conditions May 2007 Investment Outlook Following a decline in expectations during the previous quarter, it appears that the outlook for investment in industrial property has leveled off at neutral expectations. As a result, it appears that our respondents believe that it is currently a mixed time to buy. Cap Rates Over the last seven quarters, actual cap rates for industrial properties have remained relatively stable. However, expectations over the same period have not been as consistent. The volatility of expectations in 2006 appears to have stabilized over the first three quarters of 2007, during which 2007 University of Florida Bergstrom Center for Real Estate Studies 16

18 Survey of Emerging Market Conditions May 2007 the outlook continues to lean slightly toward a positive change. Yields The overall trend in required yields for warehouse and distribution, as well as Flex, R & D and office-warehouse, appears to be relatively stable over the past seven quarters, though there has been some slight volatility from quarter to quarter. While the expectation for yields changed notably in the first quarter of 2007, declining from strongly expected increases to expected stability, the past two quarters results indicate a potential upward movement towards future increases University of Florida Bergstrom Center for Real Estate Studies 17

19 Survey of Emerging Market Conditions May University of Florida Bergstrom Center for Real Estate Studies 18

20 Survey of Emerging Market Conditions May 2007 Section 5: Office Overview The outlook for office occupancy continues a three quarter move toward conservatism. The expectation is for little change with a slight leaning to increases for Class A. Expectations for rental rate growth have declined from expected growth slightly above inflation to growth slightly below inflation. The outlook for investment in office properties has taken a two quarter decline from positive to mixed, to tending cautious. Expected Occupancy While occupancy expectations for office properties were positive for most of 2006, there has been a dramatic decrease throughout the first three quarters of Optimism has weakened significantly and it appears that expectations have continued to approach neutral territory. Expected Rental Rates Expectations for office rental rates have continued to decline from levels reported in late Previous expectations for rising rental rates have given way to a more neutral view, forecasting rental rate growth to rise at the rate of inflation University of Florida Bergstrom Center for Real Estate Studies 19

21 Survey of Emerging Market Conditions May 2007 Investment Outlook It appears that the outlook for investment in offices has been scaled back as well from those predictions of early The solid positive expectations for investment that were apparent through the first quarter of 2007 appear to have weakened significantly. Current expectations appear to have reverted back to neutrality, which translates into a mixed time to buy within this market. Cap Rates Over the past seven quarters, actual cap rates for offices have remained relatively stable. While 2007 University of Florida Bergstrom Center for Real Estate Studies 20

22 Survey of Emerging Market Conditions May 2007 expectations have not been as free of volatility over this same period, the past three quarters seem to indicate a more stable picture for Class B offices, and an expected increase in cap rates for Class A offices. Yields While perceptions of required yields for offices have shown some volatility throughout 2006, there appears to have been more stability throughout As might be expected, over this period, Class B yields have been slightly higher than those of Class A, reflecting more perceived risk in Class B. However, the two appear to have converged in the third quarter of In the first two quarters of 2007, expectations of changes in required yields appeared to exhibit a decreasing trend, gravitating toward a neutral outlook for the future. However, over the past 2007 University of Florida Bergstrom Center for Real Estate Studies 21

23 Survey of Emerging Market Conditions May 2007 quarter, respondents have shown some indication that required yields for Class B offices may increase in the future University of Florida Bergstrom Center for Real Estate Studies 22

24 Survey of Emerging Market Conditions May 2007 Section 6: Retail Overview The outlook for retail occupancy, previously leaning toward increases, has become more conservative for all retail property types. The outlook now is uniformly for no change in occupancy. The outlook for rental rate changes similarly has become more conservative; where the expectation previously had risen to increases at the rate of inflation, it has dropped back to expecting increases below the rate of inflation. In similar fashion, the outlook for retail investment has become more cautious. Where it had been mixed to positive, it is now mixed to negative for all retail property types except free-standing retail. In the latter case the outlook continues to be mixed to positive. Expected Occupancy For all four types of retail large centers, neighborhood centers, strip centers and free standing the outlook for occupancy has been fairly volatile since early However, it appears that over the past quarter the outlook for each type of retail continues to settle towards an expectation of no change in occupancy. Expected Rental Rates While expected rental rates for retail had been mixed throughout 2006, there appeared to be a consistent expectation for rental rates to increase at the rate of inflation. However, in the third quarter of 2007, the outlook appears to have weakened and is moving towards rate increases that lag inflation for all retail types University of Florida Bergstrom Center for Real Estate Studies 23

25 Survey of Emerging Market Conditions May 2007 Investment Outlook Despite the optimistic rebound that occurred in the second half of 2006, the investment outlook has continued to weaken for all four retail types and appears to have reverted to neutrality. As a result, it appears that it is currently a mixed time to buy within this market. Cap Rates Over the past seven quarters, expected changes in cap rates have experienced a great deal of volatility. Despite these fluctuations, results from the first three quarters of 2007 have shown strengthening support for all retail cap rates to increase. However, actual cap rates have remained virtually constant throughout the year University of Florida Bergstrom Center for Real Estate Studies 24

26 Survey of Emerging Market Conditions May 2007 Yields Though required retail yields appear to have been quite volatile throughout 2006, 2007 has produced a more consistent pattern. Required yields over the past three quarters appear to have leveled off around ten percent. While expectations of yield changes have been just as volatile over this same time period, they presently indicate a sentiment of future increases University of Florida Bergstrom Center for Real Estate Studies 25

27 Survey of Emerging Market Conditions May University of Florida Bergstrom Center for Real Estate Studies 26

28 Survey of Emerging Market Conditions May 2007 Section 7: Outlook for Investment in Undeveloped Land Overview The drift in outlook for investment in land is toward greater caution. However, there is variation in the level. The outlook for investment in office/retail land, industrial, hospitality or for urban renewal remains mixed to positive while the outlook for unentitled land or residential land is mixed to negative. Land Without Entitlements or with Residential Entitlements The outlook for investment in land without entitlements or with residential entitlements has continued to weaken throughout Despite indication of an improved outlook in the first quarter of 2007, the following two quarters have signaled that a downward trend may resume. Currently, it remains a mixed time to buy within this market. Land With Office or Retail Entitlements While the outlook for investment in land with office or retail entitlements remained positive and steady throughout 2006, it appears that it has weakened over the first three quarters of Expectations appear to be reverting to neutrality, thus making it a mixed time to buy within this market. Land with Hospitality Entitlements The outlook for land with hospitality entitlements appears to have remained neutral over the past seven quarters. It appears that the present quarter s results reinforce that it is a mixed time to buy within this market. Land with Entitlements for Warehouse or R & D While fairly volatile throughout 2006, the outlook on land with entitlements for warehouse or R&D appears to be settling toward neutrality in the third quarter of Thus, it appears that it 2007 University of Florida Bergstrom Center for Real Estate Studies 27

29 Survey of Emerging Market Conditions May 2007 remains a mixed time to buy within this market. Land for Urban Renewal While 2006 exhibited a weakening outlook for investment in land for urban renewal, it appears that expectations have leveled off at neutrality over the first three quarters of University of Florida Bergstrom Center for Real Estate Studies 28

30 Survey of Emerging Market Conditions May 2007 Section 8: Business and Capital Availability Outlook Capital Availability There continues to be some volatility in expectations of capital availability. For the third quarter of 2007, it appears that there are no expected changes in available capital for acquisitions, but there does appear to be some sentiment that the capital available for development may decrease in the near future. Outlook of Own Business The survey respondents perception of their own business outlook has continued its dramatic decline over the past seven quarters, yet again experiencing a significant decrease in the latest quarter University of Florida Bergstrom Center for Real Estate Studies 29

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32 Survey of Emerging Market Conditions May 2007 Section 9: Dominant Investors Respondents indicated which of five investor groups they perceived to be the most active for their types of property. For ten of fifteen property types, private investors were the most dominant. The exceptions included large retail and neighborhood retail centers, market rent apartments, warehouse and distribution, and Class A offices. REITs were perceived to be the most active in the two retail categories previously mentioned, as well as in warehouse and distribution. Institutional investors played a large part in Class A offices and were also notable in the other four categories not dominated by private investors. Foreign investment was perceived to remain limited, though it did show growth from the previous quarter in large retail University of Florida Bergstrom Center for Real Estate Studies 31

33 Survey of Emerging Market Conditions May 2007 Section 10: Characteristics of Survey Respondents In the latest survey, approximately 55 percent of the 263 respondents reported being an appraiser, over half with designations of MAI, SREA or SRPA. The next largest groups, representing about eighteen percent and twelve percent of respondents respectively, were brokers and consultants. Profession of Respondents Markets of Familiarity Each respondent selected up to four regional markets with which they are familiar. Altogether, in the latest survey these choices accumulated to 523 observations. Every region, with the exception of Gainesville-Ocala, was represented by a minimum of 20 observers, with five of the regions having over 50 observers. The highest number of responses was for the Broward market with 70 representatives. The lowest was Gainesville-Ocala with University of Florida Bergstrom Center for Real Estate Studies 32

34 Survey of Emerging Market Conditions May 2007 Property Types of Familiarity Each respondent selected up to three property types with which they were familiar. Altogether, 640 selections were made in the latest survey round. Single family development was selected by 98 respondents while condominium development was selected by 76. Nine property types were selected by at least 30 respondents, and four more had at least 20 respondents University of Florida Bergstrom Center for Real Estate Studies 33

35 Section 11: Details of Cap Rates, Yields & Expected Changes Table 1 summarizes estimates of cap rates and yields for twelve property types over the last four quarters of the survey. In addition, it shows the distribution of expectations for changes in each reported cap rate and yield. For expectations, the table reports the percent of respondents expecting each cap rate and yield to either rise or fall in the future. Excluded from this table is the percentage of respondents whom are expecting no change. This third percentage can be computed as 100 less the two percentages reported. Since prior sections discuss the content of Table 1, further comment is not given here. The table is simply provided as a reference to facilitate application of the survey results University of Florida Bergstrom Center for Real Estate Studies 34

36 Table 1: Detailed Cap Rates, Yields and Expectations for Change Florida Apartments - Market Rental Condo Conversion Warehouse and Dist. Flex Space, R & D Class A Class B Retail - Large Neighborhood Strip Hospitality Business Hospitality Economy Free Standing Cap Rates Value 6.3% 6.0% 7.1% 7.4% 7.3% 7.8% 6.9% 6.9% 7.8% 8.8% 9.3% 7.4% Percent Expecting Rise 44.7% 56.5% 33.3% 40.0% 48.6% 40.3% 59.1% 51.4% 48.3% 25.0% 33.3% 56.0% Percent Expecting Fall 6.4% 8.7% 4.4% 2.0% 0.0% 4.8% 0.0% 2.7% 3.4% 0.0% 0.0% 0.0% Value 6.5% 5.6% 7.4% 7.6% 6.9% 7.8% 6.7% 7.1% 7.7% 10.0% 11.4% 7.4% Percent Expecting Rise 33.3% 46.2% 31.7% 31.0% 37.8% 36.9% 50.0% 42.9% 37.3% 66.7% 28.6% 31.4% Percent Expecting Fall 5.1% 3.8% 4.8% 1.7% 6.7% 1.5% 4.2% 2.4% 3.4% 33.3% 28.6% 2.9% Value 6.4% 5.7% 7.4% 7.8% 7.2% 8.0% 7.1% 7.1% 8.0% 9.9% 10.6% 7.7% Percent Expecting Rise 38.3% 31.8% 31.3% 29.8% 32.7% 39.7% 36.0% 33.3% 41.2% 25.0% 50.0% 40.5% Percent Expecting Fall 6.4% 18.2% 4.2% 2.1% 5.8% 6.3% 4.0% 3.5% 7.4% 0.0% 0.0% 5.4% Q4-06 Q4-06 Value 6.4% 6.1% 7.4% 7.4% 7.0% 8.1% 6.8% 6.9% 7.8% 9.4% 10.5% 7.2% Percent Expecting Rise 58.8% 68.4% 27.3% 40.0% 35.5% 31.4% 33.3% 40.0% 59.4% 50.0% 100.0% 60.0% Percent Expecting Fall 0.0% 5.3% 13.6% 8.6% 6.5% 11.4% 5.6% 2.9% 3.1% 25.0% 0.0% 0.0% Yields Value 10.5% 14.5% 10.5% 11.1% 10.0% 10.2% 9.3% 9.4% 10.2% 11.7% 13.0% 9.6% Percent Expecting Rise 34.0% 43.5% 15.6% 28.0% 21.6% 22.6% 40.9% 27.0% 29.3% 25.0% 33.3% 40.0% Percent Expecting Fall 6.4% 8.7% 0.0% 2.0% 8.1% 1.6% 4.5% 2.7% 5.2% 0.0% 0.0% 4.0% Value 10.0% 14.1% 9.9% 10.8% 10.2% 11.4% 10.5% 10.4% 10.7% 13.7% 13.0% 10.2% Percent Expecting Rise 23.1% 38.5% 20.6% 17.2% 28.9% 16.7% 37.5% 28.6% 26.7% 66.7% 42.9% 20.0% Percent Expecting Fall 7.7% 0.0% 4.8% 5.2% 4.4% 6.1% 4.2% 7.1% 5.0% 0.0% 0.0% 2.9% Value 10.1% 13.8% 9.9% 11.4% 10.4% 11.4% 10.2% 10.2% 11.1% 10.6% 13.5% 9.1% Percent Expecting Rise 21.3% 27.3% 12.5% 14.9% 30.8% 19.0% 25.0% 21.4% 23.5% 37.5% 16.7% 18.9% Percent Expecting Fall 4.3% 18.2% 6.3% 10.6% 3.8% 4.8% 8.3% 10.7% 1.5% 12.5% 16.7% 2.7% Q4-06 Q4-06 Value 10.6% 18.5% 10.7% 11.1% 11.1% 11.1% 11.1% 10.6% 10.0% 11.3% 11.0% 11.0% Percent Expecting Rise 50.0% 47.4% 13.6% 31.4% 35.5% 25.7% 27.8% 34.3% 46.9% 75.0% 100.0% 30.0% Percent Expecting Fall 8.8% 5.3% 4.5% 0.0% 6.5% 0.0% 11.1% 5.7% 0.0% 0.0% 0.0% 0.0% 2007 University of Florida Bergstrom Center for Real Estate Studies 35

37 Section 12: Industry Leaders Comments The UF Survey of Emerging Market Conditions receives input from a number of leaders and professionals in Florida s real estate industry. The following comments come from members of the UF Real Estate Advisory Board, leadership from the International Council of Shopping (ICSC), as well as membership of the Appraisal Institute s Region X, SIOR/NAREIT, and CCIM. Capital Markets In a response to the subprime residential mortgage market, lenders have tightened lending standards. However the market is still actively searching and willing to fund good commercial projects. There seems to be more capital available, but it has become tougher to get. Robert Strickland, CCIM, Tampa, Florida There is still a lot of money in the system. However, banks are being more cautious and developers cannot get pre-sale requirements for some projects. While interest rates are still historically low, developers will continue to build if banks will give them the money. Name Withheld There has been a tightening of credit requirements at all levels, some of it reflecting growing concern that the slowdown will not abate anytime soon, but rather, will extend well into 2008 and possibly into 2009 as far as Florida is concerned. Walter Dozier, Vero Beach, Florida Pressure will be on the Federal Reserve to raise interest rates during the next 12 months to counter inflation. The recent credit boom is coming to an end with consumer spending expected to continue to decline. Investment in real estate as a whole will also decline as capital sources begin to dry up. Name Withheld Lenders can still lend and just as high in the capital stack, but it will just cost more, significantly more. Interest only strips are much more restricted. Mezzanine debt is so expensive that equity is becoming attractive, and is stepping up to fill the gap. Debt markets are overreacting to the subprime issue, punishing non-related sectors. Nathan Collier, Principal & Chairman, The Paradigm Group, Gainesville, Florida UF Real Estate Advisory Board member The subprime meltdown has caused a dramatic increase in the cost of capital for apartments. Rates are up (as a function of both spreads and base index rising) and underwriting terms have tightened dramatically. Andy Hogshead, Director of Acquisitions, The Paradigm Group, Gainesville, Florida UF Real Estate Advisory Board member Capital markets are continuing to look for ways to direct the flow of funds into real estate. James Izzo, Managing Principal, The 1220 Group, Gainesville, Florida UF Real Estate Advisory Board member 2007 University of Florida Bergstrom Center for Real Estate Studies 36

38 The most acute changes have to do with the recent shake up in the CMBS market. Over the course of a few months spreads have widened, underwriting has become more conservative and amortization has worked its way back into the market. This is resulting in higher borrowing costs and lower loan proceeds, which creates downward pressure on prices. We have not seen any meaningful changes on the equity side of the capital markets, but believe there could be negative implications if the residential downturn becomes deeper and institutional losses are greater than expected. David Moret, Executive Vice President, Continental Real Estate Companies, Coral Gables UF Real Estate Advisory Board member Economic and Market Activity Economic analysis is split between residential and commercial properties. While many respondents noted the excess supply of residential properties in some areas of Florida, the consensus is for strong commercial prospects. Respondents feel that Income producing properties are in strong demand and continue to be viable investment opportunities. At the macroeconomic level, there appears to be growing concern about the general economic health of the United States and corresponding effects on the real estate market. The cost of living in Palm Beach County is going to have a direct effect on vacancies and rental rates. The addition of increasing interest rates will create adjustments in value to PBC. Duane Bennet, CCIM, Sperry Van Ness, West Palm Beach, Florida Commercial and industrial sectors have remained very strong in both sales and leasing. The industrial/commercial leasing market is strong enough to support higher lease rates associated with new construction. In fact, lease rates for both industrial and commercial are trending upward for new and existing buildings. Occupancy rates in the market as a whole are very high as well. Nolan Galloway, CCIM, SIOR, Gus Galloway Realty, Ocala, Florida Income properties are in great demand with cap rates declining over the past three years by perhaps two to three and a half points on small multitenant retail stores. Demand for vacant land has dropped, unless it is well located with a commercial zoning and concurrency in place. Residential land, in three years, has basically gone from bidding wars to no virtually no market. Ray Moore, CCIM, GVA Advantis The commercial property economy is good in South Florida, vacancies are at historical lows. Replacement costs are higher than existing product and rents are rising. There is not much available land for development but a few high end residential downtown projects may not be built, which will create opportunities to change the uses of these parcels. Name Withheld Cost and values have grown significantly and threaten to slow growth due to a sense that Florida is no longer a viable economic alternative. Cost of insurance and thus operating costs are key threats especially for the mid to small investor/ owner. Much of the regions natural resources are in question perhaps making future development a bigger challenge. Moses Salcido, SIOR, Panattoni Development Co., Orlando, Florida A very interesting trend has occurred pertaining to overall rates (cap rates). Even though interest rates have risen over the last 18 months, overall rates have remained relatively steady with decreases noted in some property types. Name Withheld 2007 University of Florida Bergstrom Center for Real Estate Studies 37

39 My main concern is the extent of debt responsibility assumed in the past several years by the average citizen and their ability to continue to meet their obligations. Name Withheld Many Florida property owners would like to move up, downsize or just move to some other property; however, if they do, then their taxes are going to go up. Therefore, not many people are even contemplating a move. It is really hurting the real estate market. The properties that are priced correctly sell in a normal three to six months marketing time. J. Lasseter, Lasseter Appraisal Co., Daytona Beach, Florida The subprime mess will continue to drag on the bond market and economy as a whole. High gas prices, real estate taxes and property insurance premiums will exacerbate the situation. Interest rates are bound to begin increasing next year as the Fed has to continue to attract foreign investment to keep huge account deficit afloat. Name Withheld Investors are returning to the market and underwriting on income in place, not anticipated income, as the risk for future increases is less certain than prior years. The focus is on existing tenants, with no added premium for purported upside or conversion potential, etc. Name Withheld Florida is dealing with issues typical of a high growth state - cost of living / affordability and strains of infrastructure. For the real estate industry, of particular concern is movement to restrict development via hometown democracy and also how much of the tax burden will be passed on to the development community to cover shrinking local budgets. Overall, housing continues to correct and income property markets remain strong. Job growth continues to be a positive. Florida is beginning to take a lead in green or environment friendly development and utility issues. Ted Starkey, Senior Vice President, Wachovia Bank, Tampa, Florida UF Real Estate Advisory Board member Tax and Insurance Tax and Insurance policy continues to be at the forefront of the residential market. Many respondents commented on how the Save Our Homes initiative could possibly be restricting the ability of households to change residences. The commercial real estate community continues to worry that residential tax reductions will be recuperated through increased taxation of commercial properties. I am concerned with the uncontrollable cost in real estate taxes and insurance. Local governments are looking for other sources of tax revenue and are looking to the commercial properties to offset some on tax losses from residential properties. Duane Bennet, CCIM, Sperry Van Ness, West Palm Beach, Florida Major concerns will be the continued high level of property taxes, despite recent legislation at the state level to deal with the higher taxes. In addition, the growing numbers of Floridians who cannot afford to buy and own residential real estate and who are leaving the state. The local markets in most states cannot sustain themselves on only in-migration of retirees or on increases of employment in the service sectors alone. Florida cannot sustain itself on minimum wage workers and three-month-a-year retiree residents. Walter Dozier, Vero Beach, Florida 2007 University of Florida Bergstrom Center for Real Estate Studies 38

40 U.S. and Florida tax policies need to be monitored closely as well as availability and affordability of casualty lines of insurance. Obviously, the Citizens Insurance initiative is too bogged down by bureaucracy to be effective, while private insurers are allowed to pick and choose the lines they offer. This, combined with property taxes, will have a continued significant effect on risk rates associated with all forms of real estate. Gregory Johnson, OMNI Realty Group, P.A., Palm Harbor, Florida It is imperative that Florida re-structure the real estate tax (assessment) laws. Homestead portability will have a positive impact on the real estate market. However it is also necessary to restrict local budget increases. Thomas Osteen, Osteen Appraisal Services, Inc., Ft. Pierce, Florida I think that the state legislature missed an opportunity to provide some meaningful and necessary property tax changes. Portability of the Save-Our-Homes assessment savings would have invigorated residential sales, allowing older folks to down-size and growing families to move up. Everyone is still trapped in their home, unable to afford the increased tax burden that purchasing a new home at current values and assessments entails. Name Withheld Hazard insurance will, in my opinion, have a dampening effect on property values. With the pending roll-back on residential taxes, I expect the county property appraisers' offices will become more aggressive in the assessment of non-residential real estate and non-homesteaded residential real estate. Name Withheld 2007 University of Florida Bergstrom Center for Real Estate Studies 39

41 2007 University of Florida Bergstrom Center for Real Estate Studies 40

42 Treasure Coast Cap Rates in the Treasure Coast area are, on average, lower than that of the state (0.33 percentage points) and range from 6.0% (Condo Conversion) to 7.9% (Strip ) Cap rates have remained relatively stable over the past quarter, with the largest changes being seen in Flex Space (-0.26% change) and Condo Conversion (+0.29% change). Cap rate outlooks are primarily neutral to positive this quarter, with Free Standing, Large Retail, and Condo Coversion having the most respondent support for increases. Required yields for the Treasure Coast area are higher, on average, than that of the state, 12.1% compared to 10.83% statewide. Required yields are highest for Condo Conversion at 16.1% and lowest for Large Retail and Neighborhood at 11.0%. The largest shifts in required yields occurred in Warehouse and Dist. (+2.26% change) and Flex Space (+2.18% change). For available property types, the investment outlook is neutral to negative. Results for Apartments and Flex Space indicate a more negative outlook than its counterparts. The outlook for Land Development is again mixed across several classifications. It appears that the most negative outlook occurs for Land with Residential Entitlements and Land without Entitlements. For available property types, sentiment on future occupancy is mixed. Respondents indicate that Apartments and Condo Conversion are the most likely to witness occupancy rate increases while Flex Space and Class B are more likely to see occupancy decreases. For available property types, rental rates are expected to increase at a rate that is slower than inflation, with the exception being Strip for which survey opinion is mixed. Future absorption rates are expected to be neutral to lower in Single Family and Condominium Development. Future price increases are expected to be slower than inflation in both Single Family and Condominium Development University of Florida Bergstrom Center for Real Estate Studies 41

43 Treasure Coast Apartments - Market Rental Condo Conversion Warehouse and Dist. Table 5a Flex Space, R & D Class A Class B Retail - Large Neighborhood Strip Free Standing Cap Rates Value Percent Expecting Rise 17% 50% 0% 25% 0% 38% 50% 25% 33% 100% Percent Expecting Fall 50% 0% 0% 0% 0% 13% 0% 0% 17% 0% Value Percent Expecting Rise 50% 100% 50% 50% 33% 50% 50% 0% 0% Percent Expecting Fall 0% 0% 0% 0% 0% 0% 0% 0% 0% Value Percent Expecting Rise 50% 33% 29% 20% 50% 14% 25% 44% 100% Percent Expecting Fall 25% 0% 0% 0% 25% 14% 0% 0% 0% Yields Value Percent Expecting Rise 0% 50% 0% 50% 0% 0% 50% 25% 33% 0% Percent Expecting Fall 33% 0% 0% 0% 0% 0% 0% 0% 17% 0% Value Percent Expecting Rise 0% 100% 25% 17% 0% 50% 25% 0% 0% Percent Expecting Fall 0% 0% 25% 33% 33% 0% 13% 0% 0% Value Percent Expecting Rise 50% 33% 29% 60% 0% 43% 38% 44% 100% Percent Expecting Fall 0% 0% 14% 20% 0% 0% 13% 0% 0% Investment Outlook Fair to Good 17% 60% 0% 0% 0% 17% Bad to Poor 83% 40% 75% 50% 50% 50% Fair to Good 50% 0% 0% 0% 38% 50% Bad to Poor 50% 25% 50% 67% 13% 0% Fair to Good 75% 38% 40% 100% 14% 25% 22% Bad to Poor 25% 25% 20% 0% 14% 13% 33% 2007 University of Florida Bergstrom Center for Real Estate Studies 42